Waiter! The Icelandic Phonebook, please!
Why Iceland’s financial collapse is a political and moral scandal / by Einar Mar Gudmundsson

Once upon a time there was a cannibal flying first class. Given an extensive menu, he politely thanked the stewardess, then handed it back and said: “I cannot find anything good for a snack. Would you be so kind and bring me the passenger list, please?”

I don’t want to equate the richest Icelanders, who together with the Government have left us out in the cold, with man-eaters, at least not in the literal sense: but after becoming incredibly wealthy, it looks like they went back to the Government and the Supervisory authorities and said: there is nothing crispy enough for us to gobble any longer. Would you be please as friendly as to provide us with the list of all Icelandic children?

And I am not saying that anybody should be compared to Kim Jong Il and Kim Il Sung, but the Government and their Regulatory Authorities look like they have replied to the country’s Monetary Aristocracy: “Yes, please, here’s the list of all Icelanders. Can we do anything else for you?”

This is nothing short of treason, and therefore we require and pretend, we, who only can claim to have children and grandchildren, the freezing of everything of value that has been used to enrich people at our own expenses. And those people must be made accountable for their actions. Since the justification for their high salaries was the fact that they were working against targets, then we should now take them at their words, and identify their responsibilities. Instead their loss has been nationalized, and the whole System invited to investigate itself.

Under these circumstances, even Franz Kafka would appear like a dry realist. True, it can be claimed that the Government is now gone, and the leadership of the Financial Control Council has been replaced: still, the old system still leads a good life. Corruption in the finance world extends up to the new government of Geir Haarde, while Iceland sits on a debt of thousands of billions of Krones. And it is us the ones that have to pay those debts, together with our children and grandchildren, now fully dependent on the good graces of the IMF and other lenders.

And in these “Tohu va bohu” times, void and without form like the world at the beginning of Creation, one should ask oneself if perhaps Karl Marx had it right all along. A friend of mine, who’s got all the volumes of the “Capital” and has even read them, told me that a condition like the one we are going through is described in the third volume. Few have read this book, and I haven’t, because there is so much mathematics in the second one.

My friend says that Marx deals in the third volume with “fictitious capital”: that means capital not with actual property behind profit, but rather with worthless pieces of paper that change hands, worthless in the sense of unreal.

That’s the box of tricks played with by the Icelandic Neokapitalists, stylishly and zippily wearing the nickname of Export Vikings. They were shining as demigods devoting themselves to noble tasks, and their wives to the plight of children in Africa, all of that, in newspapers which they owned anyway. Men bought themselves a place into companies, won the majority stakes therein, founded new companies, propped up one another and then pocketed the values of the old companies, that is, what was owned by the shareholders. That’s how the box of tricks worked, and many healthy, profitable companies have been lost along the way. Then those men went back to appear on their newspapers, with their own Alpine ski slope, luxury homes in Manhattan and yachts in Florida.

You may have noticed that I used the expression “box of tricks”. That’s not completely true. Actually, everything went according to the rules of the free market. No laws and no regulations prevented the actions of the financial Barons. The Government slumbered on, shrugged the issues away and cheered up the Money Lords, to the point that Ministers would feel more or less offended when not invited to the parties where the glitz and glamor of Hollywood rubbed shoulders with Iceland.

The basis of this system was the coalition between the Independent Party and the Progress Party, as if in a “Fishing Quotas” system, but with the right to trade and make money about fish that had yet not been caught. Soon under the coalition, the banks were privatized, without rules and without any control for the new management. The leaders of those parties, David Oddsson and Halldãr Ásgrímsson, had twelve years of experience at the Government bank. They were so keen with the privatization of banks, they generously threw in summer homes and art collections with the privatization. Anybody and everybody who criticized the new system was summarily classified as jealous, dumb or outdated.

The business sector assumed power in the country. It was based on the so-called Economic Council. Either had legislators in their bag, or these took a long nap throughout their mandate. In one declarition by the Council it is stated ‘Arguments against public regulation and control of the financial market are more convincing than arguments in favor of such meddling. It would be sensible to encourage market partners to define their own rules and abide by those”.

And about the success of their maneuvering: “An investigation by the Economic Council revealed that the Parliament in 90 percent of cases followed the recommendations of the Council itself.”
The Economic Council had de-facto got in charge, without anyone noticing.

The American expert on the financial crisis, Robert Aliber, repeatedly warned that the Icelandic Government and the Central Bank were even less capable than astrologers to steer our modern economy. They did not understand that the economic growth was built upon a pumping system, – loans were taken in order to pay off other loans – and now they do not know how to re-establish a balance, after the paper wealth has disappeared. Aliber added that it would have been unlikely that different leaders, perhaps arbitrarily selected out of the Phonebook, would have been able to create an economic Desaster as extensive as our Government did.

Iceland’s debt in per-capita terms is higher than the crippling reparations imposed upon Germany after WWI. In Icelandic Kronen, it is expected to be as much as the debt in the Italian budget. But Iceland has approximately 310 000 inhabitants, Italy 60 million.

But the Directors of the new private Banks regarded their activity as such good as a performance that they could cash in every month an equivalent sum to the Nobel Prize. Confronted to the large generosity they reserved to themselves, they angrily threatened to go abroad. We could have done well to them to wish them a good trip, like in the saga of Grettir the Strong, and to beg them just never to come back. But they claimed that abroad there was a strong demand for them, and they lied much about responsibility.

And this is now the gist of the matter, now, after the collapse: Why those that were claiming so much responsibility before, now take no responsibility? If somebody talks about the responsibility of the New Rich, it is only in juridical terms, as if something unlawful may ever be found; and as if the Nation should now be forced in rummaging through codes and contracts, in order to get reparation for the damage. This ignores the fact that responsibility lies also in social, economic, political and ethical terms.

Whilst all the wonderful prescriptions to say “sorry” come out of the crater that all that it’s left of the Banks, the New Rich say: there is nothing unnatural or unlawful in what has happened. How could it be otherwise, given the fact that the Market Economy had full control of the Parliament? Example: the Bank “Kaupthing” lent a British pubs chain around 107 billion Icelandic Krona just before collapsing – a sum approximately as high as the sum of the value of all Icelandic mortages in foreign currencies.

Let’s consider what has happened in the light of the Hávamál in the Edda, what can be considered as most ethically representative of our heritage. The question then becomes: Had anybody been able to domesticate Humans, using money to transform people into apes? That would have been the task for politicians, but it seems that of late they were tamed by the apes. How could that happen?

If the government were like our parents, the Children Protection Agency would have already intervened. Therefore it is just logical that the Government had to resign. Now there is a kind of interregnum until elections at the end of April.

Everything now depends on the active participation of the Icelanders and on their fighting spirit. The danger is that the discouse will still be nominated by the well-lubricated election machinery of the government parties, those that during our so-called pot-lid revolution have look like pitiful figures. The struggle that lies ahead is therefore also a struggle for establishing the right language. And for credibility. Currently the Elites pity themselves, angry with their executives, and the former Minister and current Head of the Central Bank David Oddsson is refusing to go, even if invited to do so by the Government. If only all the people currently unemployed would have proceeded according to Oddsson’s model, they would have simply said, upon receiving the contract termination notice, that they felt insulted and would continue to work no matter what.

Compassion, cohesion – during the booming years those were almost ridiculous notions. Competittion was seen as the natural way forward. Everybody ruminated about that. Commentators spoke under a spell, and the Market became part of television news as indispensable as the weather. Nobody dared to ask what the FTSE and Nasdaq exactly were, in order not to look a smaller player.

But if welfare programs were small during the times of prosperity, how will they become during the period of crisis that is now starting? Not everybody was rich during the fat years. We saw pensioners endure living in tiny rooms, and others become homeless. The lower wages were absurdly so, and medium-level employees had to use all their salaries to keep paying their debts and sustaining their families. It is obvious that it is not people with low wages that have benefited from the “recovery money”.

An American financier said once that the best moment to start buying things up, is during the time of riots, when blood flows through the streets. Is that what our Government is waiting to react? Signs of the beginning of that already exist. Indebted firms find themselves debt-free and back in the hands of their former owners. That goes on particularly smoothly. The same people occupuy the same positions, while each one of us has to contend with being in the red for 10 or perhaps 20 million Kronas. And like everything else, even the exact amount of our debts is a matter of contention, as they should be cumulated with household mortgages, money lost with the devaluation of the Krona, private bankruptcies and unemployment.

Perhaps Iceland is a kind of experiment for what will happen to the whole world. In any case, an at least excessive result of the situation, of the crisis, as much as it can be recognized, is that the debt obligations of the Icelandic banks are twelve times the gross national product. Someone told me that this mirrors the situation worldwide. But it is still premature to state what the crisis actually means and how it will evolve. Before the loss, nobody was right in evaluating their possessions. And now it is difficult to predict whether the “fat servant” will manage to rise, now, in the place where he was made to become a thrashed-up slave..

Long-term interest rates are at their lowest levels in half a century. Long-term interest rates are at their highest levels in nearly 20 years. This is shaping up as the worst year in seven decades for the stock market. Of the 10 best days the stock market experienced during those 70 years, six came in 2008. A Wall Street legend who became a hero for forcing Wall Street to treat investors better now admits to defrauding a later generation of investors of $50 billion. A prominent lawyer is said to have embezzled hundreds of millions by selling phony securities to hedge funds. The economists are worried about deflation. They are also fearful of inflation. The U.S. government is lending money to businesses that never could have borrowed from it before. People fear a wave of corporate bankruptcies as companies find they cannot borrow money to repay loans that are due.

This was the year the financial system stopped working. Nearly all the contradictory but accurate statements above can be traced to that fact. […]

the banking industry was in no position to assume its historical role as a lender that patiently waited for loans to be repaid. To the contrary, banks trusted neither their own balance sheets nor those of other banks. For a significant part of the economy, the government became the lender of first and only resort.

For most of 2008, the Federal Reserve and the U.S. Treasury failed to realize that the banking system faced a solvency crisis rather than a liquidity crisis. Efforts to provide liquidity proved ineffectual because no one had confidence in the values of enormous amounts of derivatives and securitizations that the banks owned.

It is more or less self-evident that it’s the whole banking system that needs to be reviewed. As soon as things turned sour, it kind of disappeared from view, apart from few notable exceptions (and nobody would bet they won’t get in trouble in the next few months if not weeks…).

Perhaps we should just accept that as things stand, all banks are ultimately owned by the state. And rather like most major US airlines, banks will periodically make a big, big mess with their accounts.

Overbloated rewards, periodic bankruptcies, giant inefficiencies, always ready to ask for Governmental handouts…that’s the characteristics shared by national airlines, and an unseemingly large number of banks.

When will anybody take the chance to build a no-frills bank?

Perhaps one or two of the super-rich Sovereign Funds or Oil Magnates will give it a try. They do have the money, after all…and they have just seen lots of it getting burned by professional bankers.

Fingers crossed…after clueless proclamations by clueless European politicians, we can only hope the current “financial crisis” is not a remake of the notorius case of King Charles II’s being “cured to death”…

[On February 2, 1685] Charles […] suddenly uttered a cry of pain and erupted into thrashing fits (most likely from a stroke that produced a brain seizure). A physician […] applied “emergency treatment,” that is, he let sixteen ounces of blood from a vein in the king’s left arm […] Scarburgh drew off an additional eight ounces […]

Unfortunately for the king, he stirred, and this “auspicious sign” was taken to mean that he would benefit from more fluids being extracted from his body. This Scarburgh did with a “volumous Emetic” that induced retching vomiting […]

Again His royal majesty stirred, and this time he was given an enema to extract still more ill humors […] another enema [was] administered […] force-fed an oral purgative […] the doctors shaved his head and smeared it with blistering camphor and mustard plasters […] encouraging frequent urination and the loss of more humors.

The patient, who thus far had felt no pain, spontaneously regained consciousness. The doctors were ecstatic. Their treatment had worked! Surely the king would benefit from more of it. […]

No need to dwell into more details of the ordeal. Charles II of England, Scotland and Ireland finally died after 5 days of “treatment”…

That would also explain the otherwise absurd sight of politicians declaring an upcoming Armageddon with one hand, and squabbling for petty gains on the other.

As usual, the only thing to fear is fear itself (and a rushed-up solution). At this rate, the best thing that can happen is that nothing substantive is agreed until after the Presidential Elections. It’s only a month to go. If President Bush is really worried about it all, he can always impose a one-month bank-holiday period 😉

Most academic economists – the economists who do not work for companies likely to benefit from the bailout, nor for the President – are opposed to this plan […]

the total value of outstanding mortgages is $11 trillion […] while the value of insurance contracts written on them is about five times as large. Clearly, Mortgage Backed Securities (MBSs), CDOs and so on, were used as collateral for lots of additional borrowing […] That explains why, as the value of those houses is dropping the whole castle of cards threatens to crumble. […]

The problem in banking is the possibility of cascading failures, that the failure of bad banks may drag down the good banks […]

What is the solution? One is for the government to step in and buy securities, as proposed in the bailout plan before Congress.

[If those securities are not properly valued, the government] will only get securities worth less than that with the taxholder responsible for the difference. Notice that the ones who reap the rewards are the holders of bad securities […] In effect in order to keep the bad banks from driving out the good we rescue the bad banks.

There are many alternative schemes to the one proposed by Treasury:

Require banks to raise more capital. [In that case] the losses are borne by the good banks rather than the taxpayer

Forgive debt in exchange for equity. [It is well known that] debt forgiveness schemes have worked for resolving financial crises in the past.

Buy foreclosed houses for the value of the mortgage

Force an orderly winding down of the housing based derivative market […]

Yes: there can be cascading bank failures and that is a bad thing. But it does not happen instantly, not tomorrow, not next week, not next month […]

The bottom line, in the immediate future, is this. The Federal Reserve Bank and its sister agencies […] already have strong tools against a cascading failure of the banking system. […] We have not seen good banks fail, nor have we seen cascading failures. We have been given no reason to think anything of the sort is imminent. […]

To debunk the obvious: Washington Mutual failed Thursday night. Washington Mutual ATM cards continue to function as usual. […] The fact that banks are reluctant to lend to each other does not have much impact on their ability to make short term loans to customers. […]

If the Federal Reserve Bank and Treasury in fact have information that things are worse than Bernanke reported they should tell us what it is. Otherwise they should stand up and make it clear that doomsday is not around the corner.